What Is Indemnification in a Master Services Agreement? A Guide for a Digital Agency

Introduction

Indemnification is a crucial element to consider for any digital agency entering into a Master Services Agreement, often referred to as an MSA. The absence of a well-defined indemnification clause can leave your agency vulnerable to serious pitfalls. For instance, imagine completing a project only to find that the client is being sued for copyright infringement based on your work. Without indemnification, your agency might bear the financial burden of legal fees and damages, which can be devastating. It’s essential to protect yourself and your business from these risks. You can add this to your agreement right now by customizing your contract here: Customize your Master Services Agreement now.

What Is Indemnification?

At its core, indemnification is a contractual obligation that sets out how one party will protect another from specific losses or damages. The purpose of this clause is to allocate risk between parties. It essentially states that if one party incurs a loss due to certain circumstances tied to the agreement, the other party agrees to cover those losses. It exists to provide peace of mind, ensuring that each party takes responsibility for its actions and any consequences that may arise from them.

Why It Matters for a Digital Agency

For a digital agency, the work is often creative and collaborative, involving various stakeholders, tools, and platforms. This complexity makes the risk of disputes and claims higher. Indemnification clauses are paramount because they help define who will be financially responsible in case something goes wrong. For example, if your agency creates a logo for a client, and the client later faces an infringement lawsuit from a third party claiming the design is too similar to theirs, the indemnification clause can protect your agency. It clarifies that the client will defend you against such claims if your design is found to infringe their rights, provided you delivered the work as agreed upon and it wasn’t altered afterward. Without this protection, your agency could find itself in a legal battle, spending significant resources defending against claims that should have fallen solely on the client.

Suggested Clause Language

*Each Party (the “Indemnifying Party”) will indemnify, defend and hold harmless the other Party and its officers, directors, employees, agents, shareholders, partners, members, owners, successors and assigns (collectively, the “Indemnified Party”) against all losses, damages, liabilities, deficiencies, claims, actions, demands, judgments, settlements, interest, awards, penalties, fines, costs and expenses of whatever kind, including reasonable attorney fees and the costs of enforcing any right to indemnification under this Agreement, (“Losses”) arising out of or resulting from: (a) any claim that the Work Product infringes on any third party’s rights, provided that the Work Product has not been altered or modified by the Client, (b) the Indemnifying Party’s gross negligence, willful misconduct or fraud, and (c) the Indemnifying Party’s material breach of this Agreement, including any representation, warranty or covenant, provided further that the Indemnifying Party is not obligated to indemnify or defend any Indemnified Party against any Losses arising out of or resulting from such Indemnified Party’s material breach of the Agreement, gross negligence, willful misconduct or fraud. An Indemnified Party will promptly notify the Indemnifying Party of the existence of any action, claim, suit or proceeding giving rise to a claim for indemnification under this section and will give the indemnifying party a reasonable opportunity to defend the same at its own expense and with its own counsel, provided that the Indemnified Parties will at all times have the right to participate in such defense at its own expense.*

This clause works to ensure mutual protection, meaning that both parties agree to indemnify each other for any mistakes or breaches. However, there are common carve-outs; for instance, a party won’t be indemnified if the loss is due to their own fault. Typically, the party that is indemnifying will control the defense and any settlements, giving them the power over how to respond legally while also keeping the other party informed and involved as necessary.

Example Scenario

Imagine your digital agency is hired to design a website for a new client. As part of the project, you use stock images sourced from an online library. After launching the website, the image library files a lawsuit against the client, claiming that the images you used infringe on their copyrights. Thanks to the indemnification clause in your Master Services Agreement, your client is obligated to defend you against this claim since they are the ones who ultimately face the consequences. They cover your legal fees and any damages that may arise, which allows your agency to focus on its creative work without undue stress about potential claims.

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FAQs

What is the difference between an MSA and an SOW?

An MSA, or Master Services Agreement, lays the foundation for the overall relationship between the parties, setting out the terms and conditions under which services will be provided. In contrast, a Statement of Work (SOW) is more specific; it details individual projects, deliverables, timelines, and responsibilities, effectively acting like a contract for a specific job within the broader MSA.

Who controls the defense and settlement?

The indemnifying party typically maintains control over defense and settlement decisions. This allows them to manage how claims are handled legally. However, the indemnified party usually retains the right to participate in that defense, ensuring their interests are protected.

What counts as “work product” in infringement claims?

“Work product” generally refers to any material created as part of a project covered by the contract. This typically includes designs, code, content, and other deliverables outlined in the MSA or SOW. If a third party claims this work infringes their rights, the indemnification clause would come into play.

How do I give timely notice of a claim?

It’s crucial to notify the indemnifying party as soon as a claim arises. The indemnified party should inform the other party promptly, providing them with all necessary details to allow a proper defense. Delaying this notification could affect your rights under the indemnification clause.

How are third-party components handled?

When your agency uses third-party components like stock images or libraries within its work product, those elements can complicate indemnification. The clause typically protects you as long as you’ve adhered to licensing agreements. If a claim arises from those components, the agency needs to demonstrate that they were used correctly and in accordance with any licensing policies.

Final Thoughts

Remember, including an indemnification clause in your Master Services Agreement is a smart move that helps safeguard your agency from unexpected claims and financial fallout. You can set this up today by customizing your contract here: Customize your Master Services Agreement now.